Word: aig
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...there's a true insight into this mess if you just step back and consider the bigger picture, not just AIG. Regardless of the details of the various swap contracts, they all represent potential transfers of wealth between financial institutions. If we consolidated the entire financial sector, all these debts would effectively vanish...
Here are two possibilities: either the vast majority of all swaps - not just AIG's - are held by investment banks, or a significant portion is held by other financial institutions like hedge funds. Suppose all swaps are held by banks. Since swaps are a zero-sum game, the banking industry as a whole cannot lose money on swaps. Then there is no need for a bailout. (See 25 people to blame for the financial crisis...
...Whichever it is, if the number of institutions involved in swap-trading were limited to those trading with AIG, then AIG is probably not too big to fail. We have to worry about chains of claims. Just because AIG dealt only with banks does not mean those banks did not rewrite similar contracts with hedge funds...
...Read "AIG's Distress: Are There Enough Fingers for This Dike...
...White House scrambled on Monday to get ahead of the latest outrage stemming from the bailout of failed corporate behemoth American International Group (AIG): $165 million in bonus pay for executives in one part of the firm, which is now 80% controlled by American taxpayers...